tv Options Action CNBC October 28, 2012 6:00am-6:30am EDT
bye-bye. this is "options action." tonight, apple saver. how would you like to get your money back in apple stock for free? it ain't on the ipad mini, but it is my trade on the tech giant. he'll show you how to get your money back, too. and too hot, no, not those guys. these guys. that's because they are teaming up for an options strategy that could triple your money in ralph lauren in two months. they break it down. why were the options traders buying this book? it's a page turner only scott nations can explain. the action begins right now. live from the nasdaq market site, i'm melissa lee. these are the traders here in times square. the earnings drubbing continues
here in times square. all three major indices finishing in the red. there is one stock catching the attention of options traders, that is netflix, having a late day rally, the move is followed by call buying in the pits all day long. basically, options traders saying it is going higher. the speculation is some type of deal with microsoft might be in the works. herb greenberg is at his desk in englewood cliffs. he's got his ear to the wall. what do you know? >> if you believe that rumor, i have a bridge to sell you. neither microsoft north netflix have any comment. this sounds like something made up by a trading desk. i'll add that, that is on a friday. there is so much of that kind of speculation on wall street, especially as stocks sink to new lows. it's like green mountain coffee, every single time the stock sold off, a new takeover rumor materialized. it's not like somebody, even microsoft, might not like -- might not want netflix at the right price.
they truly have a good brand. but it also has $5 billion in content obligations. as the company said in its last shareholders letter when it reported earnings the other day, that does not include obligations that we cannot quantify but could be significant. now, i can tell you one thing here, melissa. microsoft has $53 billion in cash after debt. there's a lot of cash there, maybe that's a drop in the bucket to them. but do they really need this now? do they need the content? i don't know. i just keep hearing the rumors. look, this is not the first time something like this has cropped up. i want to add one other thing. heck, in my 2012 predictions for this year on cnbc.com, i said maybe facebook would buy the company. it's anybody's guess what could happen here. >> i'm with you, herb. i think this is nonsense in terms of what the rumors are saying. my question for you, though, why would microsoft want to buy them and at what price do you think anything would take place? >> i don't know the answer to
that question. i don't know what the price would be. would they want to pay a higher price, do they want a skype-type situation? what do they want? i don't know. >> okay. >> i don't think anyone else does either by the way. >> i think an interesting thing about this situation, we've seen this type of speculation before in a lot of different stocks. it's interesting because what ends up happening you have people racing out, buying calls, the stock goes up, so does the price of options go up. i will let all of you know something right now. if all you ever did was fade these types of rumors in the options market you'd probably make a fine living. if there's any opportunity here, it's understanding that rumors typically are a good thing. >> herb greenberg, thanks for your reporting on this subject. as herb mentioned, in terms of it being floated at the end of the day, now netflix is at the levels prior to its earnings bomb. there's no coincidence in that. >> absolutely not. there's no coincidence that
people buy calls earlier in the day and the rumor comes out, call volume ended up being six times the daily volume in netflix. one thing that may make this feasible is the fact that microsoft is a bad buyer and herb mentioned skype. if they're going to make -- if somebody's going to make a mistake and buy netflix it might actually be microsoft. >> let's turn to the other big story in techland. that, of course, is apple. shares fell 16% at one point today. is the pain over for this beloved tech bellwether or is it about to get worse? let's get to the money right now and find out. mike, what do you think? you've been skeptical apple for a very long time. >> i have been skeptical. of course i've been skeptical even before the stock went on a tremendous tear. there's a couple things interesting about apple. if you talked about their multiples and never described the stock itself, if all you did was say i have a company for you, it is growing at double digit rates and it is x cash on its balance sheet.
trading for 11 times less earnings. people would line up outside of their brokerages to buy the stock. at the end of the day, when you take a look at a company of this size, at some point, there is saturation. it's interesting to me, the ipad mini, at some point it will steal market share from ipads. people loved the ipad. it encouraged the sale of things like mac books and computers. it helped drive sales of other products. i think at some point you're going to start seeing they're spreading themselves thinner here. there's a lot of saturation. i wonder what the real growth story is. >> exactly to that point, mike, steve jobs would be rolling in his grave if he saw the announcements that were made this week. in 1997 steve jobs specifically when he resumed the helm of apple took out the massive product lines that they had instituted and said we'll be good at one product in each separate area. it seems like they're getting away from that core ability. >> that's what a lot of analysts, they made their points in the analysts notes this morning.
it was the most prolific quarter for apple when it comes to product launches. we have not seen this many products from apple in a long time. that is going to weigh on gross margins, even if you believe they will improve in a year when volumes ramp up, they'll still be depressed this quarter and a couple quarters at least. >> that's right. ipad, mini, the margins are not -- i'm struck by the fact that they rolled it out this week along with a bunch of other stuff. it seems like they don't expect it to be a big incremental mover. we did see people not just neatening up positions in the option world in apple after earnings. which is sometimes what you see after earnings. we saw people go out to february and put on new option positions. people have a point of view about apple but that's what you would expect. it's hugely involved in retail portfolios. people love this name and love to invest in it. >> one last point, sentiment is washed out here. if you look at the 200-day
moving average, it almost touched it today, around 588. i think the stock is not necessarily a sale anymore. if you're selling it here, you're a little late. >> a lot of people own apple shares, they saw 700 and saw it quickly disappear, down 13% from the highs. what would you do? >> we talked about this strategy before. i think you're looking to do a stock recovery strategy here. >> right. >> if you have the stock, i would not add more money to that position by going out and purchasing more shares but there are ways to recover some money if the stock makes a small incremental recovery from these levels. the way i would do that, i would tlook buy a one by two call spread as an overlay against my long stock position. >> let's go over this trade that mike says could help you recoup that money. it's a one by two call structure. you buy one call and sell two higher strike calls. of the same expiration. the goal? that's where your max profit is. that's also where your stock
gets called away. word to the wise since you were short more calls than you were long, you always do this against stock, which is why this is perfect for those people out there who own the stock already and are looking to recoup some of the money. mike? >> i'm looking at the december 600, 630, one by two call spread as an overlay. i spend $25. i'm then going to sell two of the d-630s against it, collect it at 13 bucks a piece. that's a net credit of $27. when i put the trade on, i collect $2 in the process. if the stock were to sit here and do nothing, i've lost nothing by putting the position on over my long stock position. if it does rally from 600 to 630, i effectively double the profits made on my underlying long here. that's why i'm recovering some additional money. above that, the profits trail off and above the 660 level, at that point essentially i'll be out of my stock position and out of premium i've collected. but that's a nice recovery from here. think about it. how many people who own apple would be unhappy selling it up 10% from its price. >> i think a lot of people would be scared entering a
historically strong season for apple. as well as the stock and you don't want to capture profits at 630. >> i think that's a fair point. 10%, almost 11% profits from the current stock price, i don't know what people are anticipating between now and december expiration. maybe if it was really going to rip, people would be waiting to see what the holiday season looked like. that news by the way will be coming out after december expiration, right? >> right. >> if you ran this longer you'd be giving some upside. but that's just me. i've been a skeptic. >> we talked about 1 by 2 call spreads. it is the best stock rehab strategy out there, bar none. you get called away at 630, but you lever to the upside, you're effectively called away at 660. you don't lever to the downside. given that apple is almost exactly 100 bucks from its all-time high, i think this makes a ton of sense. right now if i got called away at 660, i'd love that, i'd be happy. if that happens, you have to look back and say why you put
the trade on you were happy to put on and you wanted to be called away at that level. >> last word to you. >> there are a lot of people who saw more than $700 in the historic high for apple and they want to see that again and hold on to that thing until they're made whole. >> i think there's no shot. >> no shot. >> i will say this structure is a much better way to get long a stock here than catching a falling knife. >> it's not on the new ipad mini, but of course it is right here. we're talking about stocks versus options. i want to double down on apple. 100 shares will set you back $60,000. mikes 1 by 2 call spread which should be used in conjunction with a long position, you own the stock, gives him a credit of $200 and can be worth as much as $3,000. let's move on here now, earnings season will continue with a slew of names. everything from big oil to auto to high-end retailers like ralph lauren will report. luxury retail has been a tough sector this quarter. will that pain continue when ralph lauren reports? let's call to the chart and get some answers with the man some call ralph lauren's muse.
carter braxton worth of oppenheimer. hi carter. >> hello. couple charts on ralph lauren. >> first set of drawings, stock makes a high april 2nd as the s&p does, stock makes a low on june 4th. as the s&p does. the stock market made a new high, ralph lauren failed to do that. a well-define topping out formation. second chart, drawing the lines a different way. a lot of people like to look at what is called a head and shoulders top. it speaks to how a stock that's been in an uptrend reverses. that also implies lower. the five-year chart, the stock bottomed in '09. the stock market has doubled. in this period, the stock has gone up 700%. 25 to 175. there's the head and shoulders top. any break in this trend line is bad news. for fun, take a look at this stock compared to some comps. here is coach and burberry. they're all correlated. here's ralph lauren. the presumption is ralph lauren will do what these have done. sell. >> carter says sell. where do you stand? >> i agree with carter.
i think the global growth story is a headwind for them. ralph lauren as view as the premium name. we've seen fundamental selling on apple and other winners. i think this is a similar case. >> so he's bearish. he said he's buying a put spread. it's one of the most common strategies for making a bearish trade. it's good to crack open the plybook. it's a bearish strategy. you buy one put then sell a lower strike put of the same expiration to reduce your costs. the goal? you want the stock to fall to the short lower strike put. that's where you make the most money and your profits are capped. ennis, walk us through the trade. >> i'm buying one of the december 145 put and selling one of the december 135 put, my net debit is $2.80. how does this trade make money? the trade will make money if the stock is below $142.20 on december expirey. the name reports earnings tomorrow. i'm sorry, next week. i think december gives you more time for the macro backdrop to
play out as opposed to just doing november. >> where do you stand, mike, on ralph lauren? it seems whenever there are troubles out of europe, a name like ralph lauren gets hit. >> it's not a cheap stock either. >> that's true. >> that's a good point to make here. i have been bearish for ralph lauren before. the problem is, it has sort of surprised me, waiting for this technical rollover is actually the best sign we can get that this is good. the put spread, the math works in this case. i think this is a good trade. >> it's not just that the stock expensive. >> implied volatility and options are high. options are expensive. you can't run out and buy put. you have to do a put spread. we like put spread because the math works for you. this is a perfect example. ralph lauren will revoke carter's pocket square. >> we will see him and his pocket square later on in the show. meantime got a question, send us an e-mail at firstname.lastname@example.org. also find traders blogs as well. check it out. here's what's coming up next.
can this trade still deliver profits? last week, dan made a bearish bet on amazon but the stock hasn't fallen as much as he expected. it's all good because he still didn't lose any money. how's that? we'll explain when "options action" returns. time for pump up the volume. this time we have a book that's heating up our sizzling index. this hot read starts out with the options basic, the way we measure how expensive options are. then it goes to the next level. risk premium volume at this time skew and the speed at which options erode. finally, payoff. the options strategies that you should use so you can take advantage of the phenomena. options traders are screaming for it. what's the title? the answer when "options action" returns. like a high-speed train.
plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account. so what book were options traders scrambling for this week? "options math for traders", the new book by scott nations. you heard it here first. scott nations is a published author. we have a ton of questions all the time about what's a good book for beginners options traders. that book has arrived. scott, tell us about it. >> we love to talk on the show about certain strategies. forget the math working for you. we talked about long put spread. we like to talk about the fact that those downside puts get juicy. this will explain how and why. we like to be long calendar spreads. the difference in erosion. exactly the same thing, it
explains how, why, how much, when it doesn't work, there's also a companion website, optionsmath.com. you can use that and bet your own trades before you put them on. >> look forward to cracking that thing open. moving on now. time for total recall when we update you on some of our existing trades. nathan made a bearish trade. the stock has moved against him, but he hasn't lost any money. here's why. on "options action" it's the key to amazing trades. risk less so we can make more. that's just what dan tried to do with his bearish bet on amazon. dan had the read on amazon shares. they're going lower. >> it doesn't have to do a lot to have this thing down 10% in my opinion. >> shorting the stock, ask the sad sap who tried that in 2008. to define his risk, dan instead bought the november 230 put for $7.70. now to make money, dan needs amazon stock to fall below that put strike price by more than the cost of the trade or below
222.30 by november expiration. spending $7.70? you're spending money like we're at barnes & noble, buddy. dan, let's do it for less. >> i sold one of the november 210 puts. >> so to spend less, dan sold the november 210 put for 270 and created his put spread. he did something even better. he made profits come sooner and here's how. between the 770 he spent buying one put and the 270 he collected selling the other, dan cut the cost of his trade to just $5. and now instead of needing amazon to fall below 222.30 to make money, dan can see profits if amazon drops by the more than $5 he spent on the trade or below $225 by november expiration. hold the applause. before we appoint dan the master of the universe, there's a tradeoff. by selling that put, dan did reduce his cost but he also limited his potential gains to
the difference between the strike of the put that he bought and the strike of the put that he sold. and since the time of the trade, amazon has fallen 2%, putting this trade in danger of becoming a loser. now "options action" fans across the globe want to know one thing, what will dan do now? >> all right. you might be thinking out there, if dan were so bearish why didn't he just short the stock? the answer is found by playing stock versus options where we drill down on why we use these strategies. had you simply bought the november 230 strike put you would have spent $170 and lost about $120 or 15%. but dan's put spread cost $500 and can be sold today for the same amount. how is that possible? well, because of the value of the put that dan sold has decreased. and offsets the value of the put that he bought, meaning this trade is a push. so what is dan doing? as you might have noticed, dan's not here. he was good enough to drop us this postcard. he writes greetings from the big easy. i wish trading amazon were such. the results, guidance stock
performance today are exhibit "a" for stock market ridiculousness in a market that has systematically taken apart leaders for recent disappointment. the ibm and google to name a few. the current results make the stock uninvestable. now back to the trade. as anyone who follows us on twitter knows, i close the position for a 50% gain prior to earnings. if i were still long i would look to close out. xoxo, dan. mike, what do you think? >> i agree wholeheartedly. this stock hasn't made sense to me for a very long time. even if they grew their revenues four-fold they would still not justify the multiples they have here. they could maybe grow into the price over a decade. i hate this stock. >> if you follow me on twitter, you know this was this week's worst company in the world. i don't get it all. p/e of nearly 3,000. it's just -- it is uninvestable. dan is absolutely right. >> carter, it's amazing. we had two interesting earnings
out yesterday, amazon and apple. the direction of the stocks were opposite in fact. it's fascinating. apple is owe low, reasonable. amazon is in nose bleed territory. >> exactly. that's the vagary of all this. the two of them net each other out. the amount that was gained in amazon market cap is what was lost in apple. the bounce in amazon, i would consider that a gift. it was a bad week for the stock. sell. >> all right. ennis? quickly, your feelings on amazon? >> amazon, great company, terrible stock. >> terrible stock. even though over time it has been an absolute hands down winner. >> no, no, no. going forward. i don't see why you would own it. >> this week, of course, a great reminder of why you need to follow us on twitter. at dan posts regular options as well on his trades on twitter. follow us on facebook, stay posted on the trades throughout the week at facebook.com/optionsaction. up next, the final call from the options pits.
plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account. forget halloween, radio city music hall got a jump start with their christmas festivities today. camels, donkeys and sheep
arrived for rehearsals for the living nativity segment of t christmas city spectacular. that's tonight's edition of optional viewing. i wonder what rehearsal for animals entails? anyway, time now for the last word from the options pit. scott? >> this week's extra is what not to do with options and how to recover afterwards. >> ennis? >> i like mike's 1 by 2 call on apple. i think that's the right way to get long this stock after a 15% selloff. >> mike khouw? >> i wouldn't buy any more apple and i certainly wouldn't buy amazon. for those who followed u.p.s., i don't like that stock either but there's been a lot of decay. follow us on twitter for updates on how to handle that. >> check out our facebook page as well. >> looks like our time has expired. i'm melissa lee. for more on "options action," go to optionsaction.cnbc.com. we'll see you next friday at 5:00 eastern time on cnbc. "money in motion" is up right after this break.